21 Jul 2014

Employers beware - you make your non-compete bed, you lie in it!

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The background...

In March 2014, the High Court issued an injunction restraining Mr Huggett from being directly involved with any competitive activities for his new employer, "K3", for the duration of the 12 month non-compete covenant set out at clause 19 of his employment contract with his former employer, "Prophet".

That covenant prevented Huggett from competing "in connection with any products in, or on, which he/she was involved whilst employed hereunder." So, read literally, it only applied to competitive activity related to Prophet's products. As neither K3, nor any other firm, would deal in Prophet's products, the clause gave Prophet no practical protection at all.

The Judge concluded that something had clearly "gone wrong" with the drafting and added the words "or similar thereto" to the end of the covenant, so that it applied to more than just Prophet's products. As the Judge also found that Huggett's non-solicitation and non-dealing covenants did not offer Prophet sufficient protection, and that damages would not be an adequate remedy, he granted Prophet an injunction based on the non-compete covenant.

The Court of Appeal's (CA) decision


The Judge's decision seemed to mark a significant sea change (to the delight of many employers) because the English courts have previously drawn a firm line between interpreting covenants in such a way that they can be upheld (which is permissible) and re-writing covenants (which is not).

Delivering the CA's unanimous judgment this morning, Lord Justice Rimer preferred the traditional approach. He acknowledged that, where the wording of a contractual provision is clearly ambiguous, the court will generally favour an interpretation that leads to a commercially sensible solution over one that leads to apparent absurdity; however, this was "manifestly not such a case". Nothing had "gone wrong" with the drafting - if anything had "gone wrong" it was that the draftsman had not thought through the extent to which the chosen wording would (not) actually confer any practical benefit on Prophet.

Rimer LJ therefore found that it "was not for the judge nor is it for this court to re-make the parties' clause 19 bargain. Prophet made its clause 19 bed and now it must lie upon it".

Huggett's appeal was allowed and the injunction discharged. Prophet was refused permission to appeal to the Supreme Court.

Key messages for employers...

One size really does not fit all! This was a classic example of a company applying generic covenant language to a situation which clearly required bespoke drafting. Any glimmer of hope that the English courts will effectively complete the drafting exercise for employers was unquestionably extinguished by the CA today.

Employers should check that any covenants accurately address the particular circumstances of their individual employees, taking into account a wide range of factors including:

* The nature of the business, and where geographically it is carried on;
* Who and what are the business' key customers, suppliers, staff, products and services, and the degree of contact/responsibility the individual will have with/for them;
* What trade secrets and confidential information the individual will be privy to, and
* How any of these factors will change over time, including promotion or role changes

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Kate Brearley

Kate Brearley
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